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Binance chief predicted FTX, Alameda demise: CZ says Voyager bailout ‘surprising even to me’ – let ‘bad companies fail’

By Peter Henn

Edited by Charlie Mellor


Updated

Mobile phone with Binance logo
Changpeng ‘CZ’ Zhao has said he would have done things differently – Photo: Shutterstock

In what may turn out to be a very prescient observation ahead of FTX filing for Chapter 11 bankruptcy today, Changpeng ‘CZ’ Zhao, CEO of Binance, warned the crypto industry months ago about the dangers of bailing out “bad companies” rather than letting them fail so “better projects take their place”. 

The comments from a blog post were underlined when CZ was interviewed for the gm podcast produced by Decrypt in July. 

He was asked about Sam Bankman-Fried’s trading firm Alameda Research extending a credit facility worth $500m to the now bankrupt Voyager Digital – when Alameda already owed $377m to Voyager, according to bankruptcy court filings. 

“That was surprising even to me, to be honest,” said CZ.

“I try not to comment on our competitors or industry peers. But I would never do that type of deal. I would never say, ‘I will invest in your company and then you loan me some money.’ I would just not invest in that company. I’ll keep my money.”

Bankman-Fried’s crypto empire began to unravel this week after a report from CoinDesk revealed Alameda’s balance sheet has been denominated by the ftx token (FTT) – the native crypto used by the FTX ecosystem. On 11 November, FTX, its American subsidiary FTX US and Alameda filed for bankruptcy, with former billionaire Bankman-Fried stepping down as CEO to be replaced by John J Ray III. 

BNB to USD

It was in July that Voyager filed for bankruptcy itself after the crypto hedge fund Three Arrows Capital (3AC) defaulted on a $670m loan.

However, in September, FTX won what was described as “a highly competitive auction process” to acquire Voyager’s assets, paying $1.42bn and beating the likes of both Binance (BNB) and the Coinbase (COIN) crypto exchange.

Loans upon loans?

In the summer podcast interview, Zhao went on to explain that Binance preferred a simpler approach to striking up business deals. 

SOL/USD

167.86 Price
-7.260% 1D Chg, %
Long position overnight fee -0.0753%
Short position overnight fee 0.0069%
Overnight fee time 21:00 (UTC)
Spread 2.2652

DOGE/USD

0.12 Price
-7.520% 1D Chg, %
Long position overnight fee -0.0753%
Short position overnight fee 0.0069%
Overnight fee time 21:00 (UTC)
Spread 0.0012872

XRP/USD

0.60 Price
-4.400% 1D Chg, %
Long position overnight fee -0.0753%
Short position overnight fee 0.0069%
Overnight fee time 21:00 (UTC)
Spread 0.01168

BTC/USD

64,625.05 Price
-2.340% 1D Chg, %
Long position overnight fee -0.0616%
Short position overnight fee 0.0137%
Overnight fee time 21:00 (UTC)
Spread 106.00

“Personally, for me, and to a large extent for Binance, we like very simple deals,” he said.

“We like deals like, ‘What’s your revenue? What’s your user number?’ We don’t like deals where [you say], “Hey, I owe you this money. You pay me back this much money. You invest in me, I give you more money in loans, and then you bail me out.’ Why don’t we just return all the money and go back to zero and talk about net – who owes who money?”

Contradictory bailout stance

After FTX offered a $250m worth of credit to struggling crypto broker BlockFi in the summer, CZ said in a 23 June blog post: “First, some companies/projects/products are poorly designed (no product-market fit), poorly managed, poorly operated.

“In short, they are just ‘bad’ projects. These should not be saved. Sadly, some of these ‘bad’ projects have a large number of users, often acquired through inflated incentives, ‘creative’ marketing, or pure Ponzi schemes. 

“Further, in any industry, there are always more failed projects than successful ones. Hopefully, the failures are small, and the successes are large. But you get the idea.

“Bailouts here don’t make sense. Don’t perpetuate bad companies. Let them fail. Let other better projects take their place, and they will.”

The comments were seen as a criticism of FTX and its founder. Nevertheless, in contrast Zhao said during the podcast just days later that Binance was not against putting money into companies in tricky financial situations.

He said: “Many companies are short on money, that doesn’t mean most of them are bad companies. 

“Some companies make minor mistakes their first time going through a bear market, they have good products, good teams, so we just gotta help them out a bit.”

On 8 November, Binance expressed an interest in taking over FTX, but after conducting initial due diligence, it pulled out of the deal the following day. 

Markets in this article

BNB/USD
Binance Coin / USD
569.86 USD
-17.71 -3.050%
COIN
Coinbase Global Inc (Extended Hours)
232.83 USD
-13.85 -5.620%

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The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
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